What is a Gold Loan and How Does it Work

India is one of the largest consumers of gold in the world. As per the World Gold Council (WGC), the annual gold demand in India from 1987 until 2016 has increased by 804%. And the trend does not seem to die anytime soon. The precious metal other than being used for industrial, commercial and investment purposes can also be used to get a loan at the time of a financial emergency. In fact, the gold loan is one of the easiest and fastest ways to access funds when it matters the most.

Even if you have a low credit score but ample amounts of idle gold in your locker, the gold loan can be the monetary solution for you. With the growing popularity of gold loan every year, it is important to know not only what gold loan is but also how it works, gold loan interest rates, and other related details.

What is a gold loan?

The gold loan, also referred as a loan against gold, is a secured loan that a borrower takes from a lender in lieu of gold ornaments such as gold jewelry. The loan amount sanctioned to you by lenders is generally a certain percentage of the gold’s value. You can repay it through monthly installment after which you get your gold articles back. Unlike other secured loans such as a home loan or car loan, there are no restrictions on the end use of gold loans. So whether you need to fund a wedding, family vacation or your child’s education, it is a great way to meet your sudden money requirement. Moreover, a lot of private and nationalised banks along with NBFCs offer gold loans at affordable interest rates.

How does gold loan works?

The entire process of gold loan is quite similar to other secured loans. In this, you take your gold articles to a lender along with the required set of documents. The lender evaluates the gold articles and verifies the submitted documents. As per the evaluations, the lender sanctions the loan amount. As per the loan agreement, you pay off the principal amount along with the interest amount and get the pledged gold articles back.

Who is eligible to apply for a gold loan?

Anyone who has gold can get a gold loan. Unlike personal loans, which include stringent eligibility criteria, gold loans can be availed by any Indian resident, which can include salaried professionals, businessmen, housewives, and even farmers. You don’t even need to have a good credit score to be eligible for a gold loan. So if you have a low credit score, you still have a chance to get funds, provided you have enough gold to pledge for it.

What is the interest rate on which lenders give the gold loan?

Gold loan is a secured loan; therefore, its interest rate is low in comparison to unsecured loans such as a personal loan. The interest rates levied on gold loan varies from one lender to another and depends on various factors such as gold loan tenure, loan amount, etc. It also relies on where you are taking the gold loan – a bank or an NBFC? Banks usually charge lower gold loan interest rate than NBFCs. Therefore, if you are planning to apply for the gold loan, do not accept the first offer you get. Compare gold loan offers from at least two to three lending institutions and then make your choice.

What is the gold loan tenure?

The prepayment period or gold loan tenure varies from one lending institution to another. It usually ranges from 3 to 12 months. Depending on a case, some lenders even offer a longer tenure or allow you to renew it in order to extend the tenure. Since the tenure of the gold loan is shorter in comparison with other types of loan, make sure you repay the loan amount on time. Defaulting on gold can lead to losing your gold articles forever.

How do lenders determine the gold loan amount?

Before approving the loan application, lenders evaluate the pledged gold’s purity and weight. Based on it, the gold’s market value is determined based on its current rate, which further helps in reaching the final gold amount that is to be sanctioned by lenders. Most lenders offer a gold loan with a value up to 75 percent of the pledged gold’s market value. For instance, if your gold is worth 2 lakhs, the loan amount sanctioned to you would be not more than 1.5 lakhs. Besides the Loan to value ratio, loan amount also depends on various other factors such as tenure and the borrower’s repayment capacity.

How can the gold loan be repaid?

How you can repay your gold loan depends on your lender. Most lending institutions let you pay only the interest amount each month and the principal amount at the end of the loan tenure. You can also choose to pay your gold loan through EMIs (Equated Monthly Instalments), which will include both the principal and interest component of your loan.

Leave a Comment